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CIRCULAR

GUIDING THE APPROPRIATION AND USE OF PROVISIONS FOR DEVALUATION OF INVENTORIES, LOSS OF FINANCIAL INVESTMENTS, BAD RECEIVABLE DEBTS AND WARRANTY FOR PRODUCTS, GOODS AND CONSTRUCTION WORKS AT ENTERPRISES

THE MINISTRY OF FINANCE

Pursuant to the Securities Law;

Pursuant to the Government's Decree No. 118/2008/ND-CP of November 27, 2008, defining the functions, tasks, powers and organizational structure of the Ministry of Finance;

Pursuant to the Government's Decree No. 124/2008/ND-CP of December 11, 2008, detailing and guiding a number of articles of the Law on Enterprise Income Tax;

Pursuant to the Government's Decree No. 09/ 2009/ND-CP of February 5, 2009, promulgating the Regulation on financial management of state companies and management of state capital invested in other enterprises;

The Ministry of Finance guides the appropriation and use of provisions for devaluation of inventories, loss of financial investments, bad receivable debts and warranty for products, goods and construction works at enterprises as follows:

Part I

GENERAL PROVISIONS

Article 1. Subjects of application

Organizations producing or trading in goods or providing services and earning taxable incomes as prescribed by law (below referred to as enterprises).

1. For enterprises founded under agreements concluded between the Government of the Socialist Republic of Vietnam and foreign governments which contain provisions on the appropriation and use of provisions different from the guidance in this Circular, these agreements will prevail.

2. The appropriation of provisions by credit institutions complies with the document guiding financial regimes applicable to credit institutions.

Article 2. Interpretation of terms

1. Provision for devaluation of inventories means the provision for a value lost due to the decrease in prices of in-stock supplies, finished products and goods.

2. Provision for loss of financial investments means the provision for a value lost due to the decrease in prices of securities invested by enter­prises and for the value of financial investments lost due to loss-making operation of economic organizations in which enterprises are investing.

3. Provision for bad receivable debts means the provision for the lost value of overdue receivable debts and undue receivable debts which are likely to become possibly irrecoverable due to insolvency of debtors.

4. Provision for warranty for products, goods and construction works means the provision for expenses to be spent on products, goods and construction works which enterprises have sold or handed over to buyers but are still obliged to repair or improve under contracts or commitments with customers.

Article 3. General principles in appropriating provisions

1. Provisions defined at Points 1, 2, 3 and 4, Article 2 of this Circular shall be appropriated in advance as enterprises' business expenses in the reporting year and constitute a financial source for enterprises to offset possible losses in the plan year so as to preserve their business capital and ensure that enterprises do not reflect the value of inventories and financial investments higher than their market prices and the value of their receivable debts higher than their recoverable value at the time of making financial statements.

2. The time of appropriating and refunding provisions is the end of the accounting year. In case enterprises are permitted by the Ministry of Finance to apply a fiscal year other than the calendar year (which begins on January 1 and ends on December 31), the time of appropriating and refunding provisions is the last day of the fiscal year.

Listed enterprises which are required to make mid-year financial statements may also appropriate and refund provisions at the time of making mid-year financial statements.

3. Enterprises shall work out a regulation on the management of supplies, goods and debts so as to reduce business risks. The regulation must clearly define responsibilities of each section or person engaged in the monitoring and management of goods and recovery of debts.

Enterprises are prohibited from abusing the appropriation of provisions to additionally account as groundless provisions so as to reduce their budgetary remittance obligations. Enterprises that intentionally commit violations will be sanctioned like those committing tax evasion in accordance with current laws.

4. Enterprises must set up councils to evaluate the level of provisions to be appropriated and handle actual loss of in-stock supplies and goods, financial investments and irrecoverable debts according to this Circular and other relevant legal documents. Particularly, the provision for warranty for products, goods and construction works shall be appropriated under contracts or commitments with customers.

A council is composed of the director general (or director), the chief accountant, heads of concerned sections and some experts (when necessary). The enterprise's director general (or director) shall decide on the setting up of the council.

Part II

APPROPRIATION AND USE OF PROVISIONS

Basing themselves on the actual fluctuations in the prices of inventories, prices of securities, value of financial investments, bad receivable debts and commitments on warranty for products and goods, enterprises shall take the initiative in determining the level of each provision to be appropriated, use this provision for proper purposes and handle it according to the following specific regulations:

Article 4. Provision for devaluation of inventories

1. Objects for which the provision is appropriated include raw materials, materials and tools used for production, supplies, goods and finished products left in stock (including inventories which are deteriorated, degraded, outmoded, technically obsolete, unsold or slowly circulated), unfinished products and charges for uncompleted services (below collectively referred to as inventories) which have their book original prices higher than the net realizable value and satisfy the following conditions:

- Having lawful invoices and documents according to the Finance Ministry's regulations or other documents evidencing their costs.

- Being owned by the stocking enterprise at the time of making financial statements.

In case raw materials and materials have a net realizable value lower than their original prices but the sale prices of products and services made from such raw materials and materials do not decrease, no provision for devaluation of in-stock raw materials and materials shall be appropriated.

2. Method of appropriating the provision

The level of the provision to be appropriated shall be calculated according to the following formula:

Level of provision for devaluation of supplies and goods

=

Quantity of in-stock supplies and goods at the time of making financial statement

x

Book original price of - inventories

-

Net realizable value of inventories

The original price of inventories covers buying expenses, processing expenses and other directly related expenses paid to obtain inventories of the current state and at the current place as prescribed in Accounting Standard No. 02 - Inventories, issued together with the Finance Minister's Decision No. 149/2001/QD-BTC of December 31, 2001.

The net realizable value of inventories (the value expected to be recovered) is the sale price (estimated) of inventories minus the cost for finishing the product and sale expense (estimated).

The level of the provision for devaluation of inventories shall be calculated for each kind of inventories with decreased prices and summed up in a detailed list which serves as a basis for accounting this provision into the cost of goods sold (production costs of all products and goods sold in the period) of the enterprise.

Particularly for uncompleted services, the provision for devaluation of inventories shall be calculated for each type of service having a specific charge rate.

3. Handling of the provision:

At the time of appropriating the provision, if the original price of inventories is higher than their net realizable value, a provision for devaluation of inventories must be appropriated under Points 1 and 2 of this Article.

- If the amount of provision to be appropriated is equal to the balance of the existing provision for devaluation of inventories, the enterprise is not required to appropriate such provision;

- If the amount of provision to be appropriated is higher than the balance of the existing provision for devaluation of inventories, the enterprise may add the difference to the cost of goods sold in the period.

- If the amount of provision to be appropriated is lower than the balance of the existing provision for devaluation of inventories, the enterprise shall refund the difference and record it as a decrease in the cost of goods sold.

4. Destruction of supplies and goods for which provisions have been appropriated:

a/ Unsold goods which expired, are degraded, contaminated or deteriorated and therefore no longer usable such as pharmaceuticals, food, medical supplies, breeds, livestock and other supplies and goods and must be destroyed shall be handled as follows:

The enterprise shall set up an asset-handling council to evaluate to-be-destroyed assets. The evaluation minutes must specify the names, quantity and value of to-be-destroyed goods, reasons for destruction, the value recovered from liquidation and the value of actual damage.

The value of irrecoverable actual damage of each kind of unsold goods is the difference between the book value and the value recovered from liquidation (compensations paid by damage-causing persons or goods liquidation).

b/ Handling competence: The board of directors (for enterprises with boards of directors) or the members' council (for enterprises with members' councils): the director general (or director), for enterprises without boards of directors or members' councils; and the enterprise owner shall base itself/himself/herself on the minutes of the handling council and proofs related to unsold goods to decide on the destruction of the said supplies and goods and the liability of persons related to these supplies

Level of provision for decrease in securities prices

=

Quantity of securities with a decreased price at the time of making the financial statement

x

Book price of securities

-

Actual market price of securities

and goods and take responsibility before the owner and law for their decisions.

c/ Accounting:

The value of irrecoverable actual damage of unsold goods for which a destruction decision has been issued, after being offset by the provision for devaluation of inventories, will be accounted as the cost of goods sold of the enterprise.

Article 5. The provision for loss of financial investments

1. For securities investments:

a/ Objects: Securities which satisfy all the following conditions:

- Being securities invested by the enterprise in accordance with law.

- Being eligible for free trading on the market and having the market price at the time of inventorying and making the financial statement lower than the book price.

For securities ineligible for free trading on the market such as securities restricted from transfer by law or fund stocks, no provision will be appropriated.

For organizations which have registered for securities trading such as securities companies and fund management companies set up and operating under the Securities Law, the provision for decrease in securities prices shall be appropriated under separate regulations.

b/ Method of appropriating the provision:

The level of the provision to be appropriated for decrease in securities prices shall be calculated according to the following formula:

- For listed securities: The actual market price is calculated according to the actual price on the Hanoi Stock Exchange (HNX), which is the average trading price on the day of appropriating the provision, or the Ho Chi Minh Stock Exchange (HOSE), which is the closing price on the day of appropriating the provision.

- For unlisted securities, the actual market price is:

+ The average trading price in the system on the date of appropriating the provision, for companies which have registered for trading in the market of unlisted public companies (UPCom).

+ The average price calculated according to prices quoted by at least three (3) securities companies at the time of appropriating the provision, for companies which have not registered for trading in the market of public companies.

When it is impossible to determine actual market prices of securities, the enterprise may not appropriate the provision for decrease in securities prices.

- For listed securities subject to cancellation of or suspension from trading for the 6th trading days on, the actual market price is the book value on the date of making the latest accounting balance sheet.

Enterprises shall appropriate separate provisions for each kind of invested securities with decreased prices at the time of making the financial statement and sum them up in a detailed list of provisions for decrease in securities prices, which serve as a basis for accounting such provisions as their financial expenditures.

Level of the provision for loss of financial investments

=

Parties' actual capital contributions to the economic organization

x

Actual equity capital

-

Investment capital of the enterprise

Parties' total actual capital contribution to the economic organization

c/ Handling of the provision:

At the time of appropriating the provision, if the prices of securities invested by an enterprise decrease as compared with book prices, a provision must be appropriated according to Item b, Point 1 of this Article:

If the amount of the provision to be appropriated is equal to the balance of the existing provision, the enterprise is not required to appropriate the provision.

If the amount of the provision to be appropriated is higher than the balance of the existing provision, the enterprise shall add the difference to its financial expenditures.

If the amount of the provision to be appropriated is lower than the balance of the existing provision, the enterprise shall refund the difference and record it as a decrease in its financial expenditures.

2. Long-term financial investments:

a/ Objects: Capital portions currently invested by an enterprise in other economic organizations set up under law such as state companies, limited liability companies, joint-stock companies and partnerships and other long-term financial investments for which provisions must be appropriated due to loss-making operations of these economic organizations (except cases of loss anticipated in the business plans compiled before making investment).

b/ Method of appropriating the provision:

The maximum level of the provision for each financial investment to be appropriated is equal to the invested capital amount and calculated according to the following formula:

In which:

- Parties' actual capital contributions to the economic organization are determined in the economic organization's accounting balance sheet of the year preceding the time of appropriating the provision (codes 411 and 412 of the accounting balance sheet, promulgated together with the Finance Minister's Decision No. 15/2006/QD-BTC of March 20, 2006).

- The actual equity capital is determined in the economic organization's accounting balance sheet of the year preceding the time of appropriating the provision (code 410 of the accounting balance sheet, promulgated together with the Finance Minister's Decision No. 15/2006/QD-BTC of March 20, 2006).

The ground for appropriating the provision is the positive difference between the parties' actual capital contributions to the economic organization and the actual equity capital at the time of making the financial statement of the economic organization.

The enterprise shall appropriate separate provisions for different lost financial investments and sum them up in the detailed list of provisions for loss of financial investments. This list serves as a basis for accounting these provisions as the enterprise's financial expenditures.

c/ Handling of the provision:

At the time of appropriating provisions, if the capital amounts invested in economic organizations are lost due to loss-making operations of these economic organizations, a provision for loss of financial investments must be appropriated according to Item b. Point 2 of this Article;

If the amount of the provision for loss of financial investments to be appropriated is equal to the balance of the existing provision, the enter­prise is not required to appropriate the provision;

If the amount of the provision to be appropriated is higher than the balance of the existing provision, the enterprise shall add the difference to its financial expenditures.

If the amount of the provision to be appropriated is lower than the balance of the existing provision, the enterprise shall refund the difference and record it as a decrease in its financial expenditures.

Article 6. The provision for bad receivable debts

1. Conditions: being bad receivable debts which satisfy the following conditions:

- Being evidenced by original documents, with debtors' comparison and certification of unpaid debt amounts, including economic contracts, loan agreements, written records of contract liquidation, debt acknowledgment, debt comparison and other documents.

Amounts with insufficient grounds to be recognized as receivable debts under these regulations must be treated as a loss.

- Having sufficient grounds to be recognized as bad receivable debts, including:

+ Overdue receivable debts stated in economic contracts, loan agreements or other debt acknowledgments.

+ Undue receivable debts owned by indebted economic organizations (companies, private enter­prises, cooperatives or credit institutions) which fall bankrupt or are undergoing dissolution pro­cedures, debtors are missing, have absconded, are prosecuted, detained or tried by law enforcement bodies, are serving sentences or have deceased.

2. Method of appropriating the provision:

The enterprise must estimate the possible loss or overdue period of debts and appropriate provisions for each bad receivable debt, accompanied with documents proving these bad debts. In which:

- For overdue receivable debts, the level of provisions is:

+ 30% of the value of a receivable debt which has been overdue for between over 6 months and under one year.

+ 50% of the value of a receivable debt which has been overdue for between 1 year and under 2 years.

+ 70% of the value of a receivable debt which has been overdue for between 2 years and under 3 years.

+ 100% of the value of a receivable debt which has been overdue for 3 years or more.

- For undue receivable debts owned by indebted economic organizations which fall bankrupt or are undergoing dissolution procedures; debtors are missing, have absconded, are prosecuted, detained or tried by law enforcement bodies, or are serving sentences, the enterprise shall estimate the irrecoverable loss for appropriating the provision.

- After appropriating the provision for each bad receivable debt, the enterprise shall sum them up in a detailed list which serves as a basis for accounting them as its management expenses.

3. Handling of the provision:

- When receivable debts are determined as bad ones, the enterprise shall appropriate a provision according to Point 2 of this Article; if the amount of the provision to be appropriated is equal to the balance of the existing provision for bad receivable debts, the enterprise is not required to appropriate the provision;

- If the amount of the provision to be appropriated is higher than the balance of the existing provision for bad receivable debts, the enterprise shall add the difference to its management expenses.

- If the amount of the provision to be appropriated is lower than the balance of the existing provision for bad receivable debts, the enterprise shall refund the difference and record it as a decrease in its management expenses.

4. Financial handling of irrecoverable debts:

a/ Irrecoverable receivable debts include debts in the following cases:

- For economic organizations:

+ In case debtors are bankrupt or dissolved: Court decisions on declaration of enterprise bankruptcy under the Bankruptcy Law or competent persons' decisions on dissolution of indebted enterprises are required. In case of self-dissolution, announcement of dissolved units or certification by the agency which has decided on the establishment of these units or organizations is required.

+ In case debtors have terminated their operation and become insolvent: Written certification of the termination of operation and insolvency of enterprises or organizations issued by the agency which has decided on the establishment of enterprises or organizations which have made business registration for these indebted enterprises is required.

- For individuals, any of following documents is required:

+ Death certificates (copies) or local administrations' certification, for debtors who have deceased without leaving inheritance for debt payment.

+ Local administrations' certification, for debtors who are still alive or missing but unable to pay debts.

+ Arrest warrants or certification by law enforcement bodies, for debtors who have absconded, are prosecuted or serving sentences, or local administrations' certification of the insolvency of debtors or their heirs.

b/ Financial handling:

Actual loss of each irrecoverable debt is the difference between the book receivable debt amount and the money amount already recovered (compensations paid by damage-causing persons, public sale of assets of indebted units or debtors, assets divided under rulings of courts or decisions of other competent authorities).

The enterprise shall use its provisions for bad receivable debts or financial reserves fund (if any) to offset the value of actual loss of irrecoverable debts and account the deficit amount as its management expenses.

Receivable debts, after the issuance of handling decisions, must be separately monitored by the enterprise on its accounting book and recorded off-balance-sheet for between 10 and 15 years from the date of handling and continued to be recovered with different measures. Any recovered debt amount shall, after subtracting expenses for the debt recovery, be accounted by the enterprise as other incomes.

c/ When handling irrecoverable receivable debts, the enterprise must compile the following a dossier, comprising:

- A minutes of the enterprise's debt handling council, clearly stating the value of each receivable debt, the value of recovered debt and the actual loss value (after clearing recovered amounts).

- A detailed list of receivable debts which have been written off for use as a basis for accounting, a written record of debt comparison certified by the creditor and debtor, a written record of the liquidation of the economic contract, certification of the agency having decided on the establishment of the enterprise or organization, or other objective documents evidencing outstanding debts, and relevant documents.

- The accounting book and documents proving that these debts are not yet recovered and, by the time of handling debts, the enterprise is reflecting receivable debts on its accounting book.

d/ Debt-handling competence:

The Board of Directors (for enterprises with boards of directors) or the Members' Council (for enterprises with members' councils): the director general or the director (for enterprises without boards of directors or members' councils) or the enterprise owner shall base itself/himself/herself on the minutes of the handling council and documents related to debts to decide on the handling of irrecoverable debts, take responsibility before law for their decisions and. at the same time, apply measures to handle responsible persons according to current regulations.

Article 7. The provision for warranty for products, goods and construction works

1. Objects and conditions for appropriating the provision. Products, goods and construction works which are manufactured, sold and handed over by the enterprise in the year and for which the enterprise has committed in contracts or other documents to provide warranty.

2. Method of appropriating the provision:

The enterprise shall estimate the level of warranty for products, goods and construction works sold or performed in the year and appropriate the provision for each kind of products, goods or construction works for which the enterprise has committed to provide warranty. The total provision for warranty for products, goods and construction works must comply with commitments with customers but not exceed 5% of the total sale turnover from products and goods or 5% of the total value of construction works.

After appropriating the provisions for each kind of products, goods or construction works, the enterprise shall sum them up in a detailed list which serves as a basis for accounting:

- The provision for warranty for products and goods as sale expenses.

- The provision for warranty for construction works as general production costs.

3. Handling of the provision:

At the time of appropriating the provision, if the paid amount for warranty is higher than the amount appropriated as the provision, the negative difference shall be accounted as sale expenses. If the amount of the warranty provision to be appropriated is equal to the balance of the existing provision, the enterprise is not required to appropriate the warranty provision;

If the amount of warranty provision to be appropriated is higher than the balance of the existing provision, the enterprise shall add the difference to its sale expenses, for the provision for warranty for products and goods, or its general production costs, for the provision for warranty for construction works.

If the amount of the warranty provision to be appropriated is lower than the balance of the existing provision, the enterprise shall refund the difference to:

- Sale expenses, for the provision for warranty for products and goods.

- Other incomes, for the provision for warranty for construction works.

Upon the expiration of the warranty duration, if no warranty amount is spent or the amount of provisions already appropriated has not been used up, the balance shall be refunded according to the above principles.

Part III

ORGANIZATION OF IMPLEMENTATION

Article 8. This Circular takes effect 45 days from the date of its signing, applies to the appropriation of provisions by enterprises from 2009, and replaces the Finance Ministry's Circular No. 13/2006/TT-BTC of February 27, 2006. guiding the appropriation and use of provisions for devaluation of inventories, loss of financial investments, bad debts and warranty for products, goods and construction works at enterprises, and other documents on the appropriation and use of provisions which are contrary to this Circular.

2. Any problems arising in the process of implementation should be promptly reported to the Ministry of Finance for study, amendment and supplementation.